Stock markets dive. Advisers quit. Republicans fret (at least some of them). Democrats concur (at least some of them). Industries and companies take sides. Countries protest and promise retaliation. It looks like we finally have the trade war we’ve been promised.
Donald Trump, the Unconventional President
Or do we? Donald Trump is an unconventional president, which is the understatement of the millennium. Most politicians minimize confrontation and try to avoid the public anxiety that uncertainty produces. Trump embraces both, which makes his overall strategy, yet alone his next move, difficult to predict. Is Trump about to stumble headlong into an ill-advised, no-one-benefits trade war? Or is he about to demonstrate that he really is the greatest dealmaker on the planet? Let’s look at recent history.
Year 1: Bark worse than bite
Using words like “rape” and “heist” to describe economic relations with China, Donald Trump ran the most hardline campaign on trade in recent history. He promised quick actions and said jobs would return to the US fast. Yet, since taking office his approach has been anything but hardline and the results anything but fast. He decided to not designate China as a currency manipulator, which is good, since they haven’t been doing that for many years. He also did nothing resembling his threat to place a 45% tariff on imports from China, instead announcing that his administration would study China’s intellectual property violations. One year into Trump’s presidency and, relative to trade, his bark was definitely worse than bite.
Time to get serious. Steel and Aluminum Tariffs Announced
Then, several weeks ago, Trump announced tariffs on steel and aluminum, setting off a maelstrom of recrimination that included the resignation of his chief economic advisor, one of the architects of the recent tax cuts, Gary Cohn. Cohn apparently opposed broad tariffs in favor of a more targeted approach to trade issues. No sooner had Cohn resigned than the administration began granting exemptions to certain countries, now including Canada, Mexico, Australia, and the EU, which means the original tariff concept is now much more targeted. It sure seems like Gary Cohn didn’t fully grasp the President’s eventual approach to the tariffs. If Cohn doesn’t know the president’s mind on all of this, how are the rest of us supposed to figure it out?
Next Target: China
Next, Trump set his sights on the issue which received the most attention during the campaign—China. The administration announced potential tariffs on up to $50 Billion of Chinese goods plus other potential actions relative to intellectual property and investment. As the volume of targeted goods is not even 10% of US imports from China, this is far from a broad tariff on all imports from China. But it is large enough to cause consternation, which it has. China announced tariffs on $3 billion of US goods in response to the steel and aluminum tariffs and then announced potential tariffs on $50 Billion in US goods, including the crucial products of airplanes and soybeans, in response to Trump’s China-specific tariff plan. Never one back down, Trump has now upped his tariff ante by another potential $100 Billion in Chinese goods. Sure looks like a trade war brewing.
Threats, threats, and threats, plus some wiggle room
Yet, in the midst of all the threats, Trump still has wiggle room. Most of the measures announced on both sides don’t go into effect immediately. Intense discussions between the two sides are ongoing. As with the steel and aluminum tariffs, adjustments can be made. A trade war is not inevitable. Not yet.
Trump’s rhetoric is often unnecessarily inflammatory and confrontational. His claims, such as that 1.) China is stealing America’s wealth and jobs or 2.) jobs will come back to the US fast or 3.) China is manipulating its currency, are frequently exaggerated and sometimes downright false. But, as the saying goes, just because you’re paranoid, doesn’t mean they aren’t out to get ya! Just because Trump’s approach is over the top, doesn’t mean he doesn’t have a good point, at least when it comes to China.
China trade, while not terrible, has gotten off track
For twenty-five to thirty years, our arrangement with China worked. Ten to fifteen years ago, the arrangement began to get off track. China slowed its economic liberalization program, meaning that it stopped opening more markets to foreign companies. Plus, as China grew in wealth, as opposed to simply exporting low cost items, China became both a good customer and competitor, which makes the lack of openness even more impactful and detrimental to fair trade. It’s time for China to re-accelerate its economic liberalization program.
Trump might provide the incentive China needs to change
China’s current president, Xi Jinping, promised to do that when he took office five years ago. He has fallen way short of that goal. At a recent Communist Party meeting President Xi was able to secure the potential to serve as leader of China without term limits, which makes this the perfect time for him to make good on his promise to continue free market reforms. Donald Trump might serve as the perfect catalyst to make that happen, certainly a better catalyst than just about any other politician could be.
Prepare yourself. You might have give Trump credit for something
Xi would get credit for making good on his promise and China’s economy would actually benefit. Trump could claim victory as well and tout himself as the dealmaker he claims to be. America and the global economy would benefit as well. You might not like Trump’s approach. You might not like Trump himself. But a win-win is not out of the question here. So brace yourself. You just might have to give Trump credit in the end.